Pakistan and the International Monetary Fund (IMF) have reached a staff-level agreement on a three-year (37 months), $7 billion Extended Fund Facility, the global lender announced on Saturday morning, validating Finance Minister Muhammad Aurangzeb’s claims of Islamabad fulfilling all prior actions required.
The new program, which still needs to be approved by the IMF’s Executive Board before implementation, has been endorsed by both the federal and provincial governments, read the statement issued by the lender. “This agreement is subject to approval by the IMF’s Executive Board and the timely confirmation of necessary financing assurances from Pakistan’s development and bilateral partners,” it added.
IMF Mission Chief Nathan Porter said the new program aimed to help Pakistan “capitalize on the hard-won macroeconomic stability achieved over the past year by furthering efforts to strengthen public finances, reduce inflation, rebuild external buffers and remove economic distortions to spur private sector led growth.” Among the key policy goals of the new program, it said, was achieving sustainable public finances through reforms targeting a broadening of the tax base and removal of exemptions.
“In this regard, the authorities plan to increase tax revenues through measures of 1.5% of GDP in FY25 and 3 percent of GDP over the program. In particular, the recently approved FY25 budget targets an underlying general government primary surplus of 1 percent of GDP (2 percent in headline terms),” it said. “Revenue collections will be supported by simpler and fairer direct and indirect taxation, including by bringing net income from the retail, export, and agriculture sectors properly into the tax system,” it said, adding the budget also allocated additional resources to expand social protection.
“A fairer balance of fiscal effort between the federal and provincial governments, which have agreed to rebalance spending activities in line with the 18th constitutional amendment through the signature of a National Fiscal Pact that devolves to provincial governments higher spending for education, health, social protection, and regional public infrastructure investment, enabling improved public service provision,” it said of another policy goal. “At the same time, the provinces will take steps to increase their own tax-collection efforts, including in sales tax on services and agricultural income tax,” it said, adding this would become effective from Jan. 1, 2025.
The new program also stressed on reducing inflation, deepening access to financing and building strong external buffers. “Monetary policy will continue to be focused on supporting disinflation, which will help protect real incomes, especially for the most vulnerable,” it said, emphasizing a need for the State Bank of Pakistan (SBP) to maintain a flexible exchange rate and continue to improve transparency around foreign exchange operations. “On financial stability, the authorities plan to take measures to deepen access to financing, while strengthening financial institutions, addressing any undercapitalized banks, and upgrading their crisis management framework,” it added.
“Restoring energy sector viability and minimizing fiscal risks through the timely adjustment of energy tariffs, decisive cost-reducing reforms, and refraining from further unnecessary expansion of generation capacity,” the statement continued on another policy goal. “The authorities remain committed to undertaking targeted subsidy reforms and replace cross-subsidies to households with direct and targeted BISP support,” it added.
Finally, the IMF statement said the new program would enable the promotion of private sector and export dynamism by improving the business environment, creating a level-playing field for all businesses, and removing state distortions. “In this regard, the authorities are advancing efforts to improve SOE operations and management as well as privatization (with the highest priority given to the most profitable SOEs) and strengthening transparency and governance around the Pakistan Sovereign Wealth Fund and its operations. They are also phasing out incentives to Special Economic Zones, phasing out agricultural support prices and associated subsidies, and refraining from new regulatory or tax-based incentives, or any guaranteed return that could distort the investment landscape, including for projects channeled through the Special Investment Facilitation Council. The authorities have also committed to advance anti-corruption as well as governance and transparency reforms, and gradually liberalize trade policy,” it said.
“The IMF team is grateful to the Pakistani authorities, private sector, and development partners for their hospitality during the visit to Islamabad and fruitful discussions,” it added.